Exchange mergers: good, bad or neutral?
‘It doesn’t feel good. It doesn’t look good. It smacks our national pride and it hurts. It feels like a betrayal,’ says David Weild, capital markets adviser at accounting firm Grant Thornton, chairman of Capital Markets Advisory Partners and former vice chairman of NASDAQ. ‘In some ways it’s a wake-up call – a sign of American decline. How did it happen? Who let it happen? If you want to blame it on somebody, blame it on the regulators.’
Weild believes the deals will take equity markets further down a slippery slope. ‘As stock-held organizations that serve shareholders, not issuers, these exchanges no longer have a public interest mandate the way they did before,’ he says.
Stock exchanges are increasingly focused on large-cap companies (for the volumes), derivatives (high margins) and now acquisitions (rationalization). ‘The vast majority of publicly listed companies, their investors, the brokers, analysts and the economy are thus ill-served by these mergers,’ Weild states. ‘We have lost the natural advocates for small companies and the ecosystem that supported economic growth from the marketplace.’
Weild is particularly concerned about the 80 percent of public companies that are small-cap, or under $2 bn market cap, and micro-cap companies under $500 mn, which account for more than 50 percent of exchange-listed companies in the US. ‘Some things are great for exchanges’ business models but hurt support for issuers and certainly siphon off the exchanges’ attention on smaller companies,’ he explains.
For issuers, a near-term change in listing fees is unlikely, as is any change to the services they get from their exchange. ‘There will be a review of services for issuers, a determination of which ones work or don’t work, and there may be some pruning or cross-border extensions, but I would not expect wholesale changes because so many of these services are specific to, and informed by, the regulatory and legal environment of the local market,’ Weild says.
Speaking from Washington, DC, where he was meeting with members of Congress about capital formation, Weild says US regulators have been less ‘benevolent’ than European ones, which took a lighter approach to the proliferation of high-margin derivative products such as exchange-traded funds and futures. As a result, Deutsche Börse has higher margins than the NYSE, and ultimately a bigger market cap: $10.9 bn to NYSE Euronext’s $9 bn. ‘Germany has a population of 80 mn. Its exchange would never have been a bigger market by value if it was a level playing field,’ Weild says.
According to Benn Steil, senior fellow and director of international economics at the Council on Foreign Relations in New York, whose most recent book was the award-winning Money, markets and sovereignty, there’s a clear path from merging exchanges to lowering the cost of capital for listed companies.
NYSE Euronext and Deutsche Börse were pushed into each other’s arms by stiff competition from upstarts, notably Direct Edge and BATS in the US and Chi-X in Europe. Deutsche Börse has only a 70 percent share of the trading in its own listed stocks, down from 90 percent just a few years ago. For Euronext, the percentage is even lower.
‘In order to increase market share, the exchanges have to cut trading costs, and one way to do that is to consolidate trading systems and possibly clearing systems,’ says Steil in explanation of the rationale behind the mergers.
‘Broadly speaking, trading volumes are extremely sensitive to trading costs,’ he adds. ‘And to the extent that it’s cheaper and easier to trade stocks, it reduces the cost of capital to listed companies. There’s no doubt.’
If the mergers succeed in cutting trading costs, they’ll increase liquidity. Increased liquidity will reduce cost of capital. So it goes.
Plus, if the exchanges succeed in recouping trading market share, they should show even more gusto in the competition for listings. After all, the main reason to fight for listings is the hope they’ll bring trading volume. If trading is decoupled from listing, as has been the trend, there is less incentive to lure companies with attractive fees and services. Put them back together and the perks should pick up and keep coming.
The pipe dream of just about every exchange merger is seamless trading across borders. When NYSE Euronext and then NASDAQ OMX were created, there were hopes of cross-listing US companies in Europe. It cost NYSE Euronext a lot of hard lobbying to make its ‘fast-path’ process available in 2008, but since then only 10 US stocks have cross-listed. NASDAQ OMX vowed to ‘passport’ US companies to NASDAQ Dubai and perhaps the Nordic exchanges, but the financial crisis squashed that idea.
The fact is, it’s not up to the exchanges to make the rules; it’s up to national regulators. Herbie Skeete, managing director of Mondo Visione, a London-based provider of information about exchanges, points out that when Euronext was created, it didn’t affect listed companies, which continued to operate according to their local regimes. ‘The same will be true of the NYSE Euronext/Deutsche Börse combo: companies will continue to operate under US or French or German rules,’ he says.
Or as Steil puts it: ‘It’s a lot easier to consolidate trading systems on a global basis than it is to consolidate the rules under which trading takes place.’
Skeete concedes the mergers could succeed in boosting the cross-border visibility of listed companies. For example, an NYSE company could find it easier to list in Frankfurt simply because the exchanges share a marketing umbrella. Then again, that’s already true with NYSE and Euronext.
Skeete’s conclusion? Taking everything into account, the recently announced exchange mergers would be neither good nor bad for listed companies.